Humanity has long relied on physical currency as a medium for representing and transferring value.
Some of the earliest examples of coinage date back many thousands of years. The Mesopotamian shekel is widely believed to be the oldest coin. Western Asian tribes first minted the shekel – meaning “weight” – 5,000 years ago. This example of ancient currency long predates the construction of the Egyptian pyramids and even the extinction of wooly mammoths.
Digital currency, by comparison, has a significantly shorter history and represents the first time humanity has introduced a purely non-physical currency. Because of this, a variety of misunderstands regarding the legitimacy of digital currency have been able to spread.
Let’s explore some of the myths surrounding this newest of currencies.
What is a digital currency?
In the early eighties, American computer scientist David Chaum published a paper outlining the concept of a purely non-physical currency secured by cryptography. By 1990, he had launched the currency through his company, DigiCash.
Known as eCash, it became the world’s first form of digital currency that was pseudonymous, secured by cryptography, and not government-issued.
And it didn’t exist physically.
Some of eCash’s best features, like anonymity and cryptographically secured payments, appeared in other projects. These offshoots include Adam Back’s Hashcash, Wei Dai’s B-Money, and Nick Szabo’s Bit Gold.
Then, in 2008, a programmer using the alias Satoshi Nakamato published the Bitcoin white paper. It was a nine-page document illustrating a new type of cryptographically-secured electronic money that improved upon the foundations of its predecessors.
One year later, Nakamoto launched the Bitcoin protocol, and gave life to the world’s first practical digital currency.
What is a digital currency?
Broadly speaking, a digital currency is any type of money that is exclusively non-physical. There are several components that separate it from traditional currencies:
- There are no paper notes or metal coins to represent its value.
- All units of digital currency exist as entries on a digital ledger.
- Users exchange of electronic currency over the internet using computers and online systems.
- Some forms of decentralized digital currencies, such as Bitcoin, leverage cryptography to secure, partially anonymize, and verify transactions. This decentralization removes the need for an intermediary institution.
Digital currencies should not be confused with fiat currencies and online banking. While these legacy currencies also use online systems, digital balances of fiat currencies can be exchanged for their physical counterparts. For real virtual currencies like bitcoin, individual “monetary notes” cannot be withdrawn for any physical units. The currency exists as a purely electronic monetary system.
Is cryptocurrency real?
Let’s do a quick thought experiment. This thought experiment poses two different questions: Can something intangible be real? And, how can something that’s intangible have value?
First, let’s understand whether something can be intangible and real. We can address this question easily. Yes, like many digital things, cryptocurrency can be both intangible and real. To understand how, let’s look at the internet.
The internet has been around since 1983 and represents a vast computing network that allows people all over the world to communicate and share information. Statista reported more than 5 billion people use the internet as of April 2022 — over 60% of the world’s population. Data from Internet Live Stats states there are over 1.5 billion websites online, 200 million of which are considered active.
No one would question whether the internet is real or not. In fact, we consider it one of the greatest inventions of all time. Yet it isn’t a place that you can visit, nor can you hold the internet in your hand. It exists as an intangible digital resource.
Cryptocurrencies share many of the same qualities as the internet. Like the internet, they operate on networks of interconnected computers. A wide range of applications are built on top of cryptocurrencies and millions of people around the world use them to do amazing things. Like the internet, cryptocurrencies have no physical representation. There is no box that holds the internet just as there is no wallet that holds your bitcoin. Even hardware wallets store digital representations of your assets and do not act as tender.
Next, let’s consider the principles of value theory. This theory seeks to interpret the subjective way humans attribute value to things. There are two main ways in which something can have value: intrinsically or instrumentally.
If something is valuable intrinsically, then it refers to something that has value for simply being what it is. Gold and silver, for example, are intrinsically valuable items, at least in our current context. Conversely, instrumental value refers to something that gains value through its utility.
Gold, for example, is both intrinsically valuable because of its aesthetic appeal and earthly scarcity. It is also instrumentally valuable because of its physical properties: malleability, chemical inertness, heat, and electrical conductivity, etc.
Many cryptocurrencies can also be said to have both intrinsic and instrumental value. Bitcoin, as a leading example, has a truly scarce maximum supply of 21 million and requires an amount of effort to produce. Intrinsically, these factors make it desirable. We show this value by the fact that millions of investors buy and sell it all over the world.
From an instrumental standpoint, cryptocurrencies like bitcoin have many inherent features that lead to its value. As a store of value, it’s significantly more portable, counterfeit-resistant, and divisible than gold. As a means of cross-border payment, it’s a much faster and cheaper way of transferring value overseas than using traditional banking methods.
Other features of cryptocurrency include partial anonymity, full network transparency, immunity to single points of failure, global inclusivity, and financial self-sovereignty.
Ultimately, the problem facing cryptocurrency is not the fact that you cannot hold it. Instead, the problem is that many consider the technology to be immature and complex.
Cryptocurrency is the first money humankind has used that isn’t like what we’ve used for 5,000 years. It’s a new, exciting frontier that is both powerful and purely digital. The ushering in of a new financial frontier, like any momentous change to the way people do things, will take time.
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These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell, or hold any digital asset or to engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets and you should seek independent advice on your taxation position.